G.R. No. L-46898-99 - Philippine National Bank vs. De los Reyes

Case Summary (G.R. No. L-46898-99)

Material Facts and Transactions

On August 30, 1966, the respondent spouses, Amando Arana and Julia Reyes, mortgaged six (6) parcels of land in Cantilla, Sorsogon, to PNB to secure a loan of P10,000.00. Two parcels were covered by free patent titles, while the other four parcels were untitled and covered only by tax declarations. For failure to pay the loan after maturity, PNB, relying on a special power of attorney in the mortgage deed, conducted an extrajudicial foreclosure under Act No. 3135, as amended, and purchased the properties at public auction for P12,735.30, an amount that included expenses of sale, interest, and attorney’s fees. The certificate of sale was dated July 1, 1969 and was registered on July 8, 1970. After the one-year redemption period under the law expired without redemption, PNB executed an affidavit of consolidation of ownership on July 9, 1970, and thereafter obtained new titles in its name for the two titled parcels, while placing the untitled parcels under its name via the corresponding tax declarations.

PNB’s officers communicated to the spouses that consolidation had occurred and that repurchase would be possible within a certain period. PNB’s letters in 1971 invited repurchase, and a later letter in December 19, 1971 indicated that PNB would take actual possession if repurchase was not made by November 30, 1971. On May 9, 1972, PNB entered into a contract to sell the six parcels to Gerardo Badong for P27,000.00, with P5,400.00 as down payment, and notified the spouses of the transaction on May 31, 1972. The spouses refused to surrender possession of the two parcels covered by free patent titles, and Badong could not take possession; on that basis, PNB sought a writ of possession.

Commencement of Actions and Trial Court Handling

On July 12, 1972, the respondent spouses instituted Civil Case No. 2677 for legal redemption of the six parcels, invoking Section 119 of the Public Land Act, and for damages. PNB answered on August 15, 1972, conceding the spouses’ right to repurchase the two titled parcels but denying redemption of the four untitled parcels covered only by tax declarations. Separately, PNB filed an ex parte petition in Special Proceeding No. 2679 for issuance of a writ of possession over the two parcels covered by tax declarations that Badong could not obtain possession of, and the trial court granted the writ on July 27, 1972.

As the trial court observed, when the writ of possession was issued, Civil Case No. 2677 had already been filed. Because the spouses refused to relinquish possession despite the writ, PNB filed a motion in Special Proceeding No. 2679 seeking to cite the spouses for contempt of court. Civil Case No. 2677 and the contempt motion were heard jointly by agreement. At pre-trial on December 27, 1973, the parties stipulated that the two parcels were titled with specific free patent titles; that the four other parcels were untitled but with applications for free patent already filed; that PNB had instituted extrajudicial foreclosure after failure to redeem within the loan claim of P12,735.30; that there was no judicial confirmation of consolidation; that the spouses deposited P12,500.00 at the Legaspi Branch of PNB “on account of the redemption” for the Sorsogon Branch; that PNB was willing to have the two titled lots redeemed but not the untitled parcels; and that the spouses argued for redemption of all parcels based on the indivisibility of mortgage.

During the pendency of the suit, the spouses also deposited P12,500.00 with the clerk of court.

Trial Court Rulings and the Modification on Reconsideration

After trial on the merits, the court a quo rendered its decision of May 11, 1976, holding that the spouses were entitled to redeem all six (6) parcels on the theory of the indivisibility of mortgage. It also dismissed PNB’s contempt petition in Special Proceeding No. 2679. It ordered PNB, upon payment of the deficiency amount beyond the P12,500.00 already deposited, to execute a release of mortgage; it further rescinded and cancelled PNB’s promise-to-sell contract with Badong and directed PNB to return the amount paid by Badong without interest, as well as to turn over possession of the parcels then held by the defendants.

PNB’s motion for reconsideration was denied in the resolution of January 17, 1977, which nevertheless modified the legal reasoning. The trial court ruled that the doctrine of indivisibility was deemed waived when PNB agreed to redeem the two titled lots. It further held that the redemption period for the four untitled parcels was one (1) year, not five (5) years. Despite that, the court allowed redemption of the four untitled parcels on equity.

Issues on Review and the Court’s Treatment of the Parties’ Theories

PNB, through its petition for review on certiorari, challenged the lower court’s disposition on several fronts. Its assignment of errors faulted the court a quo for allowing redemption of the four parcels not covered by free patent on an “equitable ground,” for ruling that judicial confirmation of the foreclosure sale was necessary for the purchaser to acquire absolute ownership and the corollary right of possession, and for holding that the issuance of a writ of possession ex parte was void for violation of due process. PNB conceded redemption of the two titled parcels, consistent with Section 119 of Commonwealth Act No. 141, under which the mortgagor had five (5) years from the date of conveyance within which to redeem. The Court also agreed with the concession that a formal offer to redeem need not be made independently, since filing an action within the redemption period is equivalent to an offer, and consignation of the redemption price was likewise not necessary for preservation of the right.

The central dispute lay in the four untitled parcels. PNB argued that the spouses had only one (1) year after the foreclosure sale to redeem, invoking Section 6 of Act No. 3135, as amended by Act No. 4118, and Section 20 of the PNB charter, Republic Act No. 4300, as amended. The spouses contended that the mortgage should be treated as indivisible, so that redemption of the titled parcels carried with it the untitled parcels. They added that since they had applied for free patents over the four untitled parcels, the five-year period under the Public Land Act should apply to those parcels as well.

Mortgage Indivisibility: Why It Did Not Govern the Case

The Court held that the rule on indivisibility of mortgage under Art. 2089 did not apply. The doctrine bars the foreclosure or release of only a portion of the mortgaged property where there had been partial payment and corresponding partial extinguishment of the secured debt. It protects the mortgagee against attempts to cancel or release part of the collateral before the debt is fully paid. The Court explained that after full foreclosure and sale of the mortgaged properties, there was no remaining debt and therefore no mortgage to preserve or partially release; indivisibility ceases to matter once a complete foreclosure extinguishes the mortgage. Likewise, the exception contemplated by Art. 2089—where several things mortgaged each guarantee a determinate portion of the credit—was not shown by the record.

The Public Land Character of the Untitled Parcels and the Invalidity of the Mortgage

The Court, however, did not rest solely on mortgage indivisibility. It found an overriding and determinative consideration: the record admitted that applications for free patent over the four untitled parcels had already been filed and were pending with the Bureau of Lands when the mortgage was executed. Thus, the Court treated the properties as public lands at the time of the mortgage. That circumstance had never been rebutted by PNB.

From this premise, the Court reasoned that the enforceability of PNB’s foreclosure depended on whether the mortgage was valid and enforceable. An essential requisite for the validity of a mortgage is that the mortgagor be the absolute owner of the property mortgaged. Since the spouses were not yet owners of the four parcels when the mortgage was allegedly constituted, they could not validly create an encumbrance over property still forming part of the public domain. Their interest was characterized only as a mere right of expectancy or contingent right dependent upon the outcome and performance of conditions necessary to obtain title, which cannot properly be the object of a valid mortgage contract. Accordingly, the Court held that the mortgage was absolutely null and void from inception, and PNB acquired no better rights by reason of registration.

The Court further rejected the idea that later issuance of free patents could validate the earlier mortgage through estoppel. Once the patents issued and the lots came under the Public Land Act, the Court applied Section 118 of Commonwealth Act No. 141, which prohibits taking such property to satisfy debts contracted prior to the expiration of five (5) years from the date of issuance of the patents. Thus, even after acquisition of title by the mortgagors, the protected period under the Public Land Act prevented the creditor from appropriating the property for the satisfaction of the earlier debt.

Redemption and Mutual Restitution: The Remedy for Nullity Ab Initio

Given the nullity ab initio of the mortgage over the four parcels, the Court held that there was no need for the spouses to “repurchase” those parcels from PNB. Instead, the case called for mutual restitution as an equitable remedy. The Court ordered that mutual restitution be effected by the parties with respect to what they had respectively received under the transaction concerning the four parcels. It noted that the records were

Case Syllabus (G.R. No. L-46898-99)

The petition for review on certiorari assailed (1) the decision dated May 11, 1976 of the then Court of First Instance of Sorsogon, Branch I in Civil Case No. 2677 and Special Proceeding No. 2679, and (2) the resolution dated January 17, 1977 denying petitioner’s motion for reconsideration.
The controversy arose from an extrajudicial foreclosure of mortgaged parcels of land and the subsequent claims of legal redemption and related reliefs.
The lower court granted redemption of the mortgaged parcels and dismissed petitioner’s contempt petition, while later modifying the basis and time-period for redemption in its resolution.
The Supreme Court resolved the case on the footing that the disputed issues involved mainly questions of law.

Parties and Procedural Posture

Philippine National Bank (PNB) acted as the mortgagee and foreclosing creditor in the proceedings below and became the petitioner before the Supreme Court.
Respondents were Hon. Rustico de los Reyes, and the spouses Amando Arana and Julia Reyes, who were the mortgagors and plaintiffs seeking redemption.
In the trial court, respondents pursued Civil Case No. 2677 for legal redemption and damages, while petitioner pursued Special Proceeding No. 2679 for issuance of a writ of possession and later sought contempt against respondents.
The trial court heard Civil Case No. 2677 and petitioner’s contempt motion in Special Proceeding No. 2679 jointly by agreement of the parties.
The Supreme Court treated the case as properly elevated by direct appeal by certiorari and considered it submitted for decision without respondents’ brief due to their failure to file within the required period.

Key Factual Allegations

Respondent spouses mortgaged six (6) parcels of land located in Cantilla, Sorsogon to PNB to secure a loan of P10,000.00.
The mortgaged properties included two (2) titled parcels covered by free patent titles and four (4) untitled parcels covered only by tax declarations.
Upon failure to pay after maturity, PNB foreclosed extrajudicially under Act No. 3135, as amended, pursuant to a special power of attorney in the mortgage deed.
PNB purchased the properties at public auction for P12,735.30, an amount that included expenses of sale, interest, and attorney’s fees.
The certificate of sale was dated July 1, 1969, and PNB registered it with the Register of Deeds on July 8, 1970.
After the one-year redemption period under Act No. 3135 expired without redemption, PNB executed an affidavit of consolidation of ownership on July 9, 1970 and had titles issued in its name for the titled parcels while placing the untitled parcels in its name based on tax declarations.
PNB sent letters inviting repurchase of the lands, respondents requested extensions, and PNB advised it would take actual possession unless repurchase was effected by a stated deadline.
PNB entered into a contract to sell the six parcels to Gerardo Badong, which included a down payment upon execution, and notified respondents of the transaction.
Respondents instituted Civil Case No. 2677 on July 12, 1972 seeking legal redemption under Section 119 of the Public Land Act and claiming damages.
PNB conceded the right to repurchase the two (2) titled parcels but refused redemption of the four (4) untitled parcels.
Badong could not take possession of two parcels covered by tax declarations because respondents refused to surrender possession, and PNB proceeded with possession through an ex parte petition.
The trial court granted an order in Special Proceeding No. 2679 for a writ of possession, and PNB later moved to cite respondents for contempt due to non-compliance.

Pretrial Stipulations and Deposits

The parties stipulated at pre-trial that parcels one and two were titled lands bearing Free Patent Titles P-123 and P-130.
The parties stipulated that parcels three, four, five, and six were not titled but that respondents had filed applications for free patent titles and that those applications were pending.
The parties stipulated that PNB instituted extrajudicial foreclosure for non-redemption, that the bank’s claim at foreclosure was P12,735.30, and that there was no judicial confirmation of consolidation of title in favor of PNB.
The parties stipulated that respondents deposited P12,500.00 with the Legaspi Branch of PNB on account of redemption intended for the Sorsogon Branch.
PNB was stipulated to be willing to allow redemption of the two titled parcels, but not the untitled parcels.
Respondents argued that the mortgage was indivisible, contending that redemption should extend to titled and untitled parcels.
During the pendency of the suit, respondents further deposited P12,500.00 with the clerk of court of the trial court.

Trial Court Disposition

After trial, the lower court’s decision dated May 11, 1976 held that respondents were entitled to redeem all six (6) parcels under the doctrine of “indivisibility of mortgage.”
The lower court in Civil Case No. 2677 ordered redemption for the sum of P12,735.30, directed respondents to complete the deficiency after their deposit of P12,500.00, and ordered PNB to execute a release of mortgage upon payment.
The lower court ordered cancellation of the contract to sell between PNB and Badong and directed PNB to return the amount paid by Badong without interest.
The lower court also ordered PNB and Badong to turn over possession of the parcels in their possession to respondents.
The lower court dismissed petitioner’s contempt petition in Special Proceeding No. 2679.
In its resolution dated January 17, 1977, the lower court modified the reasoning by ruling that the doctrine of indivisibility was deemed waived by PNB when it agreed to redeem the two titled lots.
The lower court in the same resolution held that redemption for the four untitled pa